Arkansas Blog

Tax cuts for rich don't lift the economy

Ernie Dumas is back again this week to remind Arkansans that tax cuts for the rich are no ticket to economic prosperity, though the wealthy surely do appreciate the windfall.

All that you need to do is hail Bill Clinton and George W. Bush. One raised taxes modestly on high incomes a few months into his first term and the other drastically slashed taxes on high incomes in his first few months in office and again the next two years. Remember the hoopla each time. Every Republican voted against Clinton’s tax increase, which closed the huge budget deficits of the previous 12 years, and they warned of a new depression. The Bush tax cuts were supposed to create a boom the likes of which the nation had never seen.

The actual numbers for the seven and a half years after the Clinton tax increase and a similar span after the Bush tax cuts? Clinton, 23 million net new jobs, Bush 1.1 million net new jobs.

As Dumas notes, this only mirrored the earlier Reagan and George H. W. Bush tax-cutting experience.

And what about Arkansas?

State income taxes have been raised only one time since 1929 if you don’t count two temporary hikes. The permament one was in 1971, when the top marginal rate was raised from 5 to 7 percent. Arkansas experienced some of its sharpest business and job growth in the three years that followed. Until then, Arkansas had by far the lowest per-capita state and local taxes of the 50 states, yet was last or 49th in per-capita income year after dreary year.

We also tested the theory that cutting taxes for the investor class—“the job creators”—will get people off the jobless rolls. In 1999, in his one legitimate claim to be a tax cutter, Gov. Mike Huckabee got the legislature to cut income taxes on capital gains by 30 percent. Things got very bad after that, so bad that Huckabee called the legislature into special session and begged the legislators to raise taxes instantly, including the income tax, so the state would not have to cut people off the health rolls. A 3 percent surtax on personal and corporate incomes for two years put thestate back on sound footing. Huckabee came back on the last day and thanked the lawmakers for their courage.

Full column follows.

By Ernest Dumas

Republican politicians everywhere, or at least in Washington and Arkansas, are approaching a rare harmonic convergence. They are selling their elections on a single idea, lowering taxes on people with reasonably high incomes— well, that idea and stopping the expansion of health insurance to the sick and poor in 2013.

The tax cut is Mitt Romney’s plan for unshackling the economy and creating jobs, and Republicans in both houses of Congress put it at the top of their agenda. The tax cut along with repealing health-insurance and deep cuts in programs for the aged, poor and disabled was the heart of the big budget blueprint that all Republican congressmen embraced in April and vow to enact into law if they and Romney carry the day in November.

It is the Republican plan for Arkansas if the party captures both houses of the legislature. GOP leaders say it will end years of stagnation in Arkansas and create good jobs for everyone. It is the one conservative political principle that in Washington and Little Rock has proved to be simple, tested, and wrong.

Yes, it is the only economic notion I know of that has been thoroughly vetted, over and over, and proven to be fallacious. It has never worked. People who get the tax cuts are happier and the government may get by without the money, but it doesn’t create jobs, at least not in detectable numbers. You can hire an economist to craft a study saying that it will produce growth and jobs, but the truth is in simple numbers.

All that you need to do is hail Bill Clinton and George W. Bush. One raised taxes modestly on high incomes a few months into his first term and the other drastically slashed taxes on high incomes in his first few months in office and again the next two years. Remember the hoopla each time. Every Republican voted against Clinton’s tax increase, which closed the huge budget deficits of the previous 12 years, and they warned of a new depression. The Bush tax cuts were supposed to create a boom the likes of which the nation had never seen.

The actual numbers for the seven and a half years after the Clinton tax increase and a similar span after the Bush tax cuts? Clinton, 23 million net new jobs, Bush 1.1 million net new jobs.

But the evidence already was ample. The theory that cutting taxes on the wealthy—“the job creators”—began with Arthur Laffer, and President Reagan tested it in 1981. The big tax cuts were supposed to produce unparalleled growth and new jobs—Laffer’s parabolic curve on an envelope proved it would happen. Instead, the country fell into the deepest recession since the ‘30s. Unemployment soared above 10 percent for 10 straight months, and over 8 percent for 27 months. But Reagan began raising taxes the next year to stop the hemorrhaging and the massive deficits. Reagan and Bush would raise taxes eight times, the big one being the tax reform act of 1986, which taxed capital gains fully like wages, repealed the investment tax credit and generally closed tax loopholes for big investors like Mitt Romney.

What happened then? The current theory is that taxing capital gains kills jobs, but unemployment fell from 7 to 5 percent over Reagan’s final two years and the hefty job growth accounts for the Reagan “economic miracle.”

But surely the story is different in our little confined economic laboratory in Arkansas.

State income taxes have been raised only one time since 1929 if you don’t count two temporary hikes. The permament one was in 1971, when the top marginal rate was raised from 5 to 7 percent. Arkansas experienced some of its sharpest business and job growth in the three years that followed. Until then, Arkansas had by far the lowest per-capita state and local taxes of the 50 states, yet was last or 49th in per-capita income year after dreary year.

We also tested the theory that cutting taxes for the investor class—“the job creators”—will get people off the jobless rolls. In 1999, in his one legitimate claim to be a tax cutter, Gov. Mike Huckabee got the legislature to cut income taxes on capital gains by 30 percent. Things got very bad after that, so bad that Huckabee called the legislature into special session and begged the legislators to raise taxes instantly, including the income tax, so the state would not have to cut people off the health rolls. A 3 percent surtax on personal and corporate incomes for two years put thestate back on sound footing. Huckabee came back on the last day and thanked the lawmakers for their courage.

Still, doesn’t it make sense that if you cut the Walton heirs some slack and let them keep a few hundred million more each year they will call up the headquarters and tell them to hire more greeters?